Welcome

PensionTsunami's primary focus is on California's public employee pension crisis, but we also monitor news in other states, keep an eye on the world of corporate pensions, and follow developments in Social Security since it is taxpayers who will ultimately be responsible for making up deficits incurred by any of these retirement plans. We also try to monitor international trends. The editor of PensionTsunami.com is Jack Dean (JackDean-at-PensionTsunami-dot-com).

Sponsored Links

September 15th

By Ed Ring | Pension reform in San Jose began in June 2012 when voters, by a margin of 69% to 31%, approved Measure B. Despite overwhelming support from voters, however, this vote triggered a cascade of union funded lawsuits which by 2015 had overturned several of the key provisions of the reform measure. Finally, in August 2015, the San Jose city council passed a compromise resolution that replaced Measure B with a scaled down reform; this was approved by voters in November 2016.

The provisions of this new pension reform measure should be of keen interest to local reformers everywhere in California, because they survived relentless attacks in court. While these reforms may not prove sufficient to completely solve the challenge to adequately fund pension benefits for city workers in San Jose, they are nonetheless significant. San Jose’s current unfunded pension liability now stands at just over $3.0 billion. These reforms are estimated to save $1.7 billion over the next ten years. Here are highlights:

HIGHLIGHTS OF SAN JOSE’S 2016 PENSION REFORM

1 – Voter approval required from now on:
Any retirement benefit – including pensions and retirement healthcare – cannot be enhanced as the result of negotiations between the city council and union leadership, unless those enhancements are first approved by voters.

2 – New employees will be subject to a reformed package of retirement benefits:
Employees hired after the following dates (Police, 8/04/2013; Fire, 1/02/2015; Misc., 9/30/2012) shall be deemed “Tier II” employees, with the following retirement benefits:

Cost sharing: The city shall not pay more than 50% of the normal and unfunded payments due the pension system; this will be phased in by increasing the employee share of the unfunded payment at a rate of 0.33% of additional withholding of their pay per year.
Age of eligibility: Police and firefighters shall be eligible for retirement benefits at age 57; miscellaneous employees at age 62.
Cost of living adjustments: annual COLA increases to pensions shall be limited to the lessor of the CPI index or between 2.0% and 1.25%.
Pension eligible compensation: Final compensation for purposes of calculating the pension shall be based on the average of the final three years of work, and (with some exceptions for police and firefighters) be limited to base pay only.
Cap on pension benefit: Police and fire retiree pensions are capped at 80% of pension eligible salary, for miscellaneous employees the cap is 70% of pension eligible salary.

3 – “Disability” retirements awarded by independent panel.

4 – “Supplemental Payments” discontinued:
Prior to this reform, whenever investment returns in any given year exceeded the target percentage, supplemental payments were made to retirees. This practice took place even when the pension system was carrying a significant unfunded liability. This new provision even bars supplemental payments if the fund eventually exceeds 100% funding, in order to take into account the possibility that subsequent annual returns may again fall short of projections.

5 – Defined benefit retirement healthcare discontinued:
The defined benefit retiree healthcare plan is ended and instead a Voluntary Employee Beneficiary Association (VEBA) is established for new and current Tier 2 employees. The contribution rate will be 4% into the VEBA. Tier One employees can opt-in to the new VEBA, or keep their defined benefit healthcare plan with a contribution rate of 8% of payroll.

6 – Retirement contributions fixed:
Similar in intent to item #4, even if the pension system becomes more than 100% funded, there will be no lowering of the required employee contributions to the fund via payroll withholding – again, to take into account the possibility that subsequent annual returns may again fall short of projections.

7 – No retroactive benefits enhancements:
If retirement benefits are approved by voters, they are only to apply to work performed subsequent to the date of approval. If an employee transfers into a new job with the city that offers better retirement benefits than the job they vacated, these enhancements only apply to their work subsequent to their transfer.

PENSION REFORM – SAMPLE LANGUAGE

Section 1503-A. Reservation of Voter Authority.
(a) There shall be no enhancements to defined retirement benefits in effect as of January 1, 2017, without voter approval. A defined retirement benefit is any defined post-employment benefit program, including defined benefit pension plans and defined benefit retiree healthcare benefits. An enhancement is any change to defined retirement benefits, including any change to pension or retiree healthcare benefits or retirement formula that increases the total aggregate cost of the benefit in terms of normal cost and unfunded liability as determined by the Retirement Board’s actuary. This does not include other changes which do not directly modify specific defined retirement benefits, including but not limited to any medical plan design changes, subsequent compensation increases which may increase an employee’s final compensation, or any assumption changes as determined by the Retirement Board.

(b) If the State Legislature or the voters of the State of California enact a requirement of voter approval for the continuation of defined pension benefits, the voters of the City of San Jose hereby approve the continuation of the pension benefits in existence at the time of passage of the State measure including those established by this measure.

Section 1504-A. Retirement Benefits – Tier 2.
The Tier 2 retirement plan shall include the following benefits listed below. This retirement program shall be referred to as “Tier 2” and shall be effective for employees hired on or after the following dates except as otherwise provided in this section: (1) Sworn Police Officers: August 4, 2013; (2) Sworn Firefighters: January 2, 2015 and (3) Federated: September 30, 2012. Employees initially hired before the effective date of Tier 2 shall be Tier 1 employees, even if subsequently rehired. Employees who qualify as “classic” lateral employees under the Public Employees’ Pension Reform Act and are initially hired by the City of San Jose on or after January 1, 2013, are considered Tier 1 employees.

(a) Cost Sharing. The City’s cost for the Tier 2 defined benefit plan shall not exceed 50% of the total cost of the Tier 2 defined benefit plan (both normal cost and unfunded liabilities), except as provided herein. Normal cost shall always be split 50/50.In the event an unfunded liability is determined to exist, employees will contribute toward the unfunded liability in increasing increments of 0.33% per year, with the City paying the balance of the unfunded liability, until such time that the unfunded liability is shared 50/50 between the employer and employee.

(b) Age. The age of eligibility for service retirement shall be 57 for employees in the Police and Fire Retirement Plans and 62 for employees in the Federated Retirement System. Earlier Retirement may be permitted with a reduction in pension benefit by a factor of 7% per year for employees in the Police and Fire Retirement Plan and a reduction in pension benefit by a factor of 5% per year for employees in the Federated Retirement System. An employee is not eligible for a service retirement earlier than the age of 50 for employees in the Police and Fire Retirement Plan or age 55 for employees in the Federated Retirement System. Tier 2 employees shall be eligible for a service retirement after earning five years of retirement service credit.

(c) COLA. Cost of living adjustments, or COLA, shall be equal to the increase in the Consumer Price Index (CPI), defined as San Jose – San Francisco – Oakland U.S. Bureau of Labor Statistics index, CPI-Urban Consumers, December to December, with the following limitations:

1. For Police and Fire Retirement Plan members, cost of living adjustments applicable to the retirement allowance shall be the lesser of the Consumer Price Index (CPI), or 2.0%.

2. For Federated Retirement System members, cost of living adjustments applicable to the retirement allowance shall be the lesser of CPI or:
a. 1-10 total years of City service and hired after the effective date of the implementing ordinances of the revised Tier 2: 1.25%
b. 1-10 years total years of City service and hired before the effective date of the implementing ordinances of the revised Tier 2: 1.5%
c. 11-20 total years of City service: 1.5%
d. 21-25 total years of City service: 1.75%
e. 26 or more total years of City service: 2.0%

3. The first COLA adjustment will be prorated based on the number of months retired in the first calendar year of retirement.

(d) Final Compensation. “Final compensation” shall mean the average annual earned pay of the highest three consecutive years of service. Final compensation shall be base pay only, excluding premium pays or other additional compensation, except members of the Police and Fire Plan whose pay shall include the same premium pays as Tier 1 members.

(e) Maximum Allowance and Accrual Rate. For Police and Fire Plan members, service retirement benefits shall be capped at a maximum of 80% of final compensation for an employee who has 30 or more years of service at the accrual rate contained in the Alternative Pension Reform Settlement Framework approved by City Council on August 25, 2015. For Federated Retirement System members, service retirement benefits shall be capped at a maximum of 70% of final compensation for an employee who has 35 or more years of service at the accrual rate contained in the Alternative Pension Reform Settlement Framework approved by City Council on December 15, 2015, and January 12, 2016.

(f) Year of Service. An employee will be eligible for a full year of service credit upon reaching 2080 hours of regular time worked (including paid leave, but not including overtime).

Section 1505-A. Disability Retirements.

(a) The definition of “disability” shall be that as contained in the San Jose Municipal Code in Sections 3.36.900 and 3.28.1210 as of the date of this measure.

(b) Each plan member seeking a disability retirement shall have their disability determined by a panel of medical experts appointed by the Retirement Boards.

(c) The independent panel of medical experts will make their determination based upon majority vote, which may be appealed to an administrative law judge.

Section 1506-A. Supplemental Payments to Retirees.

The Supplemental Retiree Benefit Reserve (“SRBR”) has been discontinued, and the assets returned to the appropriate retirement trust fund. In the event assets are required to be retained in the SRBR, no supplemental payments shall be permitted from that fund without voter approval. The SRBR will be replaced with a Guaranteed Purchasing Power (GPP) benefit for all Tier 1 retirees. The GPP is intended to maintain the monthly allowance for Tier 1 retirees at 75% of purchasing power of their original pension benefit effective with the date of the retiree’s retirement. The GPP will apply in limited circumstances (for example, when inflation exceeds the COLA for Tier 1 retirees for an extended period of time). Any calculated benefit will be paid annually in February.

Section 1507-A. Retiree Healthcare.

The defined benefit retiree healthcare plan will be closed to new employees as defined by the San Jose Municipal Code in Chapter 3.36, Part 1 and Chapter 3.28, Part 1. Section 1508-A. Actuarial Soundness (for both pension and retiree healthcare plans).

(a) In recognition of the interests of the taxpayers and the responsibilities to the plan beneficiaries, all pension and retiree healthcare plans shall be operated in conformance with Article XVI, Section 17 of the California Constitution. This includes but is not limited to:

1. All plans and their trustees shall assure prompt delivery of benefits and related services to participants and their beneficiaries;

2. All plans shall be subject to an annual actuarial analysis that is publicly disclosed in order to assure the plan has sufficient assets;

3. All plan trustees shall discharge their duties with respect to the system solely in the interest of, and for the exclusive purposes of providing benefits to participants and their beneficiaries, minimizing employer contributions thereto, and defraying reasonable expenses of administering the system;

4. All plan trustees shall diversify the investments of the system so as to minimize the risk of loss and maximize the rate of return, unless under the circumstances it is not prudent to do so;

5. Determine contribution rates on a stated contribution policy, developed by the retirement system boards and;

6. When investing the assets of the plans, the objective of all plan trustees shall be to maximize the rate of return without undue risk of loss while having proper regard to the funding objectives of the plans and the volatility of the plans’ contributions as a percentage of payroll.

Section 1509-A. Retirement Contributions.

There shall be no offset to normal cost contribution rates in the event plan funding exceeds 100%. Both the City and employees shall always make the full annual required plan contributions as calculated by the Retirement Board actuaries which will be in compliance with applicable laws and will ensure the qualified status under the Internal Revenue Code.

(a) Any enhancement to a member’s defined retirement benefit adopted on or after January 1, 2017, shall apply only to service performed on or after the operative date of the enhancement and shall not be applied to any service performed prior to the operative date of the enhancement.

(b) If a change to a member’s retirement membership classification or a change in employment results in an enhancement in the retirement formula or defined retirement benefits applicable to that member, except as otherwise provided under the plans as of [effective date of ordinance], that enhancement shall apply only to service performed on or after the effective date of the change and shall not be applied to any service performed prior to the effective date of the change.

(c) “Operative date” would be the date that any resolution or ordinance implementing the enhancement to a member’s defined retirement formula or defined retirement benefit adopted by the City Council becomes effective.

The utility’s large overtime tab in the electric operations division grew steadily beginning around 2012, but it became noticeable in 2015.

In June that year, the emails show that one dispatcher sent colleagues an email with the subject line, “Overtime and REST TIME in DANGER,” in which he proposed they all make suggestions on how to trim overtime costs before management did it for them.

One employee responded: “We have a contract. They have to honor it. … Don’t think stuff up for them.”

In March 2016, Electric Field Manager Ron Cox wrote to Utilities Principal Analyst Shelly Almgren to explain why the electric division had exceeded its overtime budget three months before the end of the fiscal year.

… something is out of whack in our state, where government pensions, benefits and salaries are far beyond what most working people in the private sector could ever hope for.

A keen observation. While defenders of public pay extol their high pay as a virtue that others should seek to replicate, it is neither fair nor sustainable when that high pay comes at the expense of those earning much less.

July 15th

Public employee unions try to use good years to deflect attention from a growing problem.

By Steven Greenhut | California’s fiscal watchdogs are bracing for the forthcoming press statements from the nation’s largest state-run pension fund, and from the public-sector unions that depend on the system to pay their members’ generous retirement packages.

Expect something to this effect: “The California Public Employees’ Retirement System’s investment earnings for the fiscal year ending June 30 were above 9 percent, reconfirming the health of the state’s pension system—and debunking the naysayers who claim that unfunded pension liabilities will obliterate municipal and state budgets.”

There’s no question that many investors will see returns approaching or even exceeding double-digit levels for the recently completed fiscal year, as the stock market has done exceedingly well in recent months. A pension crisis? As police officers often say at the scene of an accident, “Keep moving, folks. Nothing to see here.”

Californians need to temper the glowing statements and shrug off the efforts to keep us from looking too closely at the wreckage. Of course, impressive stock-market returns are a good thing that reduce the amount of taxpayer-backed pension obligations. But one good year doesn’t fix a problem that has been two decades in the making. For perspective, CalPERS’ returns for the previous two fiscal years were 0.6 percent and 2.4 percent respectively.

It could take decades to make up not only for past years of poor stock-market performance, but for the massive and relentless retroactive pension increases that state and municipal governments have been granting their workers since 1999.

Crane was responding to a Sacramento Bee op-ed by a union president, who recently compared investment returns to the state’s drought: “The funded ratio of pension funds has risen and fallen like the levels at Lake Shasta.” The union official, Yvonne Walker of the Service Employees International Union Local 1000, has gotten an early start on the kind of argumentation we should expect. She blasts pension reformers’ “doomsday predictions.” Just like the drought, low returns won’t go on forever.

Indeed, private 401(k) retirement plans and public “defined benefit” plans both are dependent on investment returns, but in significantly different ways. In a 401(k) plan, the employee contributes a set amount of money to the account, to which some employers offer full or partial matches. If the market soars, the employee’s nest egg grows. If it falls, so does the account balance. There is no unfunded liability because the employee isn’t promised any specified amount of retirement income.

In the public sector, employees are guaranteed an annual benefit based on a formula. California police and fire officials, for instance, typically receive 90 percent or more of their final years’ pay until they and their spouse pass away. Nothing short of a municipal bankruptcy can legally reduce what they receive. The pension funds invest the dollars contributed by the agency and employees in the stock market. Even if the stock-market does poorly and the liabilities rise, the retirement pay stays the same.

That’s why CalPERS and other union-controlled pension funds have a vested interest in celebrating up years and downplaying bad years. Good years let them hide the amount of taxpayer-backed debt that’s accumulated. These pension funds also predict unrealistically high rates of return far into the future, which masks the size of the problem and reduces efforts to lower pension benefits.

But there is a steep cost to this approach. When public agencies spend more on pensions, they must cut services or raise taxes. Most are savvy enough to pitch the tax hikes as being for “public safety” or “transportation,” rather admit they are needed to pay for pensions. “Deceptively-hidden pension liabilities are already ravaging education and other public services and already causing tax, tuition and fee hikes,” Crane explained.

This is a national problem, although it hits California hardest because of the state’s overly generous pension system. A recent national study by the well-respected Hoover Institution at Stanford University found that “pension promises are consuming state and local budgets.”

The study says pension funds hide their costs through their investment assumptions: “What is in fact going on is that the governments are borrowing from workers and promising to repay that debt when they retire, but the accounting standards allow the bulk of this debt to go unreported through the assumption of high rates of return.”

There are a few good reasons for doom saying.

Even a year of good returns will do little to correct the vast level of pension underfunding. After this year’s returns, “the nation’s largest public pension system will still be seriously underfunded,” Ed Mendel reported in a recent Calpensions article. CalPERS is now only 65 percent funded and “is worried about a downturn that might drop funding below 50 percent, a red line actuaries think makes recovery very difficult.”
Pension spending continues to consume local and state budgets and is leading to cutbacks. In a recent CityWatch LA article, the California Policy Center’s David Schwartzman detailed governmental cutbacks in California cities tied to growing pension costs. For instance, Santa Barbara County laid off 70 employees and remains unable to fund $546 million in infrastructure improvements. In a July 8 article, Crane detailed the woes of California’s public school systems, which are struggling even during “an economic recovery and after a large tax increase.” He pins the blame on “exploding spending on pension and retiree health-care obligations.”

It’s unrealistic to bank on this year’s stock-market surge to be followed by additional surges. During his budget announcements each year, Gov. Jerry Brown (D) always features a chart showing that, since the turn of the millennium, the years with budget deficits outnumber those with surpluses. Brown’s points deal with general-fund budgets rather than pensions, but the point is similar. It’s more realistic to expect downturns than unending boom years.

Indeed, the Pensions & Investments article about the latest returns is aptly headlined, “Strong returns nice, but aren’t expected to last.” Ed Ring’s May 2016 California Policy Center analysis concluded that public pension funds “will be hit much harder in a downturn than private pension funds” because they “are not subject to the same rules that private pension funds have to adhere to.”

Because unions continue to control the state Capitol and many local governments, we will see a continued ratcheting of compensation levels. Here’s one small example from the VoiceofOC, which reported this month that the Santa Ana City Council just hiked the pay for 477 police employees “amid staff projections of major funding shortfalls.” Median police compensation there is now above $213,000, according to the news site. As we’ve seen many times before, good fiscal news typically leads unions to lobby for even higher pay and benefit levels.

By all means, let’s toast the favorable stock-market returns. But a more reasonable press release would suggest that despite those returns, the pension crisis continues to be as pressing as ever. Let’s not be misled by those with a vested interest in downplaying the problem.

June 21st

By David Crane | Governor Jerry Brown and the California Legislature have approved a scheme under which a special state fund filled with citizen-paid fees will lend money to the state General Fund, which in turn will contribute the proceeds to a state pension fund that in turn will invest in stocks in the hope of generating profits to help reduce pension deficits. In doing so, Brown and the legislature haven’t disclosed to citizens that the same profits, if earned, could’ve been used for more citizen services. Here’s how:

Brown’s scheme transfers $6 billion from the Surplus Money Investment Fund, which houses citizen-paid fees (eg, gas taxes, motor vehicle fees) until those fees are needed for government services such as road repair, etc. Brown says SMIF has more cash than it can use until 2030. Because current law limits SMIF from investing in anything other than short-term notes, he proposed that SMIF lend $6 billion at short term floating rates to the General Fund, which will contribute the proceeds to a state pension fund (CalPERS) that will invest for the longer term and use the hoped-for difference to reduce state spending on pension deficits.

Of course, another alternative would be to amend the statute that now limits SMIF’s investment options to allow SMIF to invest that cash on a longer term basis and generate those profits for itself. Brown expects his scheme to generate $11 billion in profits. If so, that’s an extra $11 billion that citizens could’ve added to funds to be used for road repair, etc.

Instead, Brown and the legislature have chosen to skim profits from citizens in order to pay past credit card charges; ie, to pay financing costs relating to past employee services that were charged to the future. Brown’s scheme also covers up past wealth transfers to employees. That wealth transfer occurs when “Normal Costs”—the only pension costs shared by state employees, as explained here and here—are artificially depressed by public pension fund boards setting artificially high investment return assumptions. For example, a decade ago in 2007 CalPERS used an 8 percent investment return assumption for setting Normal Costs. In contrast, the defined benefit plan at Berkshire Hathaway employed a materially-lower (6.9 percent) investment return assumption (see page 44 here). CalPERS’s use of the artificially higher rate reduced Normal Costs well below those of Berkshire’s—and also produced big pension deficits for citizens when, not surprisingly, actual investment returns fell well short of the inflated assumed rate. Now, Brown wants to skim profits from the investment of other citizen-funded monies to help address the deficits caused by insufficient Normal Costs. Citizens should feel battered.

Pension costs were relatively easy to address a decade ago. All that was necessary was a reasonable investment return assumption for setting Normal Costs. But state officials chose otherwise, leading to large and expensive pension debt that, as explained here, will continue growing fast. At this stage, the state should be seeking a reduction in pension debt, just as an indebted individual should seek to reduce credit card debt. One way to achieve that would’ve been for Brown and the legislature to tender an offer to employees to relinquish expensive future pension benefits in exchange for cash (or a market-rate note from the General Fund that tenderers could sell for cash). Just as a bank gives up expensive future interest earnings when credit card debt is paid off, employees should give up expensive future interest earnings when the state pays off pension debt. Instead Brown and the legislature have chosen a path that covers up past wealth transfers, allows the employees who benefited from those wealth transfers to keep earning expensive interest, and skims potential profits from citizens in order to fund that expensive interest.

Worse, there is no guarantee the loan will be paid back (the due date is on or before June 30, 2030; see the draft bill here). To understand how that might happen, try this thought experiment: How are a governor and legislature likely to act in 2030 when the terms of the loan require $6 billion to be transferred out of the General Fund to a special fund under their control for nothing in exchange? As a further thought experiment, just try to imagine Jerry Brown and the legislature transferring $6 billion this year from the General Fund to a special fund under their control in repayment of a borrowing drawn from a special fund long ago. What are the chances they would defer that repayment? Indeed, even quarterly interest payments are at risk to being skipped, especially in tough budget years. After all, the special fund is under the control of a governor and legislature who generally get credit for what they do with the General Fund, not with special funds. And if you’re thinking the designated source of loan repayment—a taxpayer-funded account established by Proposition 2 to accelerate payments on certain state debts— will make the payments, think again. That designation was just a fig leaf given that existing liabilities eligible for repayment by Prop 2 already dwarf the size of that fund.

Though Jerry Brown has not used his recent two terms in office to address core fiscal issues, until now he has generally avoided budget gimmicks. This time is different.

Posted in California at June 21st, 2017 by Jack Dean| Comments Off on Jerry Brown’s big skim

June 14th

In my essay the other day I provided an alternative to Governor Brown’s pension loan — actually pay down pension debt.

You could do that by offering to redeem future pension payments for cash today. Provided the amount you pay is no greater than the present value of those future pension payments using the discount rate CalPERS uses to present value those payments, then you would actually pay off debt. If you wanted to save the citizens you serve even more money, you could start by offering less than present value.

Ideally such a pay-down would not be paid for with borrowed funds but if you insist on borrowing, then at least swap the floating rate loan from the special fund into a fixed rate loan so you actually know your cost and don’t subject citizens to floating rate loan risk. Together with the redemption outlined above, a fixed rate would lock in savings equal to the difference between the loan rate and the discount rate.

You should understand that the path proposed by Governor Brown and embraced by Treasurer Chiang and Senator Moorlach–a path you are about to embrace–is no different than the path mortgage lenders induced borrowers to take before 2008: i.e., a “teaser” low interest floating rate loan the proceeds of which are invested in assets (houses in that case) expected to grow at a higher rate and earn big profits for borrowers. Just see the stunning language from Brown’s budget below. That language goes beyond representations made by mortgage brokers and is eerily similar to assertions made by the state when it enacted SB 400 in 1999 (eg, “will not cost a dime”).

Public officials should not lead citizens down similar paths. You should actually pay down pension debt or you should not proceed with the current proposal.

David Crane

From page 7 of Governor Brown’s May Revision: “The May Revision proposes a $6 billion supplemental payment to CalPERS through a loan from the Surplus Money Investment Fund. This payment is expected to earn a 7 percent return from CalPERS, compared to the less than 1 percent currently earned from the fund. Over the next two decades, this supplemental payment will save an estimated $11 billion . . ..”

May 17th

By Steven Greenhut | The Jerry Brown administration last week released its revised May budget and, lo and behold, it has finally decided to (kind of, sort of) tackle the state’s massive and growing level of unfunded liabilities – i.e., the hundreds of billions of dollars in taxpayer-backed debt to fund retirement promises made to the state’s government employees.

It’s best to curb our enthusiasm, however. The governor didn’t have much of a choice. This was the first state budget that is compliant with new accounting standards established by the Governmental Accounting Standards Board that requires states to more properly account for retiree medical and benefits beyond pensions.

Because of those new standards and low investment returns, the state’s unfunded liabilities (including the University of California retirement system) soared by an astounding 22 percent since last year. But even this new estimate of $279 billion in liabilities is on the optimistic side. Some credible estimates pin California state and local governments’ pension liabilities at nearly $1 trillion, based on more realistic rate-of-return predictions.

The pension system invites eyes-glazing-over debates about the size of the liability. That’s because debts are calculated on guesswork about future investment earnings. The California Public Employees’ Retirement System (CalPERS) recently voted to lower its predicted rates from 7.5 percent a year to 7 percent. The lower the predicted rate, the higher the liabilities, which is why CalPERS and the state’s unions are so bullish on Wall Street.

CalPERS’ latest investment returns were below 1 percent, but the agency insists there’s nothing to worry about and no need to do the unthinkable (reduce future benefit accruals for current employees). That’s the same CalPERS, of course, that in 1999 assured the Legislature that a 50-percent retroactive pension increase wouldn’t cost taxpayers a dime. I suppose CalPERS was right. It didn’t cost a dime, although it did cost many billions of dollars. Their returns were then yielding 13.5 percent a year, and CalPERS figured the heyday would go on forever.

The other reason to be skeptical of the Brown administration’s commitment to solving the problem can be found in the May revise itself. The budget “includes a one?time $6 billion supplemental payment” to CalPERS, according to the Finance Department. “This action effectively doubles the state’s annual payment and will mitigate the impact of increasing pension contributions due to the state’s large unfunded liabilities.”

Where is the extra $6 billion coming from in a budget that supposedly is so pinched that the governor recently signed a law raising annual transportation taxes by $5.2 billion?

Simple. The state is borrowing the money to pre-pay some of its debt. “The additional $6 billion pension payment will be funded through a loan from the Surplus Money Investment Fund,” according to the budget summary. “Although the loan will incur interest costs (approximately $1 billion over the life of the loan), actuarial calculations indicate that the additional pension payment will yield net savings of $11 billion over the next 20 years.”

In other words, the state will be borrowing the money at fairly low interest rates and then investing the money and earning, it hopes, higher rates. The difference will help pay down some of those retirement debts. Even the well-known pension reformer, Sen. John Moorlach, R-Costa Mesa, lauded the administration for embracing that idea.

But it’s something of a shell game. It should work out well, provided the markets do as well as the state expects. In doing this, however, the state is taking out new debt that will need to be repaid. There’s no free money here. A number of localities have embraced a similar strategy with pension-obligation bonds, which are a form of arbitrage, in which the government is borrowing money and betting on future market returns.

This gimmick is similar to the one people will embrace in their personal lives. Are those credit-card debts crushing the family budget? Then borrow money from the home-equity line of credit at 5 percent and use it to pay down the 10-percent credit card loans. It makes sense, but it doesn’t deal with the real problem of excessive consumer spending.

“This is the Band-Aid,” said Dan Pellissier, a former aide to Gov. Arnold Schwarzenegger and well-known state pension reformer. “The surgery everyone is trying to avoid is on the California Rule – changing the benefits public employees receive in the future.”

When it comes to pensions, everything comes back to that “rule,” which isn’t a rule but a series of court precedents going back to the 1950s. In the private sector, companies may reduce pension benefits for their employees in the future. An employee can be told that, starting tomorrow, she will accrue pension benefits at a lower rate. The California Rule mandates that public employees, by contrast, can never have their benefit levels reduced.

That limits options for reform. In 2012, Gov. Brown signed into a law the Public Employees’ Pension Reform Act (PEPRA), which promised to address the pension-debt problem by primarily reducing benefits for newly hired employees. A reform that affects new hires will reduce contribution rates but won’t make an enormous difference until they start retiring.

“Gov. Jerry Brown’s attempt at pension reform has failed,” opined Dan Borenstein, in a recent East Bay Times column. The reason: the rapidly growing pension debt. “The shortfall for California’s three statewide retirement systems has increased about 36 percent. Add in local pension systems and the total debt has reached at least $374 billion. That works out to about $29,000 per household.”

CalPERS rebutted Borenstein by arguing that he “greatly oversimplifies and needlessly discounts the real impact that Governor Brown’s pension reform has had since it took effect in January 2013.” The pension fund insists, “PEPRA already is bending the pension cost curve – and will keep doing so with greater impact every year going forward.”

Yet the growing liabilities and the administration’s latest budget plan suggest that whatever minimal cost savings PEPRA is achieving aren’t nearly enough. Of course, union-controlled CalPERS’ goal isn’t protecting taxpayers or the state general fund – it is to enhance the benefits of the state workers whose pensions it manages.

As Calpensions explained, that $6 billion of borrowed money doubles the amount of general-fund dollars that the state is paying to deal with pension obligations. Meanwhile, as the state borrows money to pay that tab, it raises taxes to fund transportation. If Brown and the Legislature had trimmed pension costs, it would not have needed to raise gas taxes and the vehicle license fee. And the problem reverberates for local governments, too.

The May revise also showcased the same old issue with the administration’s priorities. Los Angeles Times columnist George Skelton noted that “Brown’s entertaining rhetoric itself made him sound, as usual, like a skinflint, a penny-pinching scold. But the introductory document could have been written by Bernie Sanders, if not Depression-era Socialist Upton Sinclair, the losing 1934 Democratic candidate for governor who ran on the slogan ‘End Poverty in California.’”

The budget championed myriad big-spending programs, including higher pay for public employees. So the state has been spending like crazy, but can’t manage to deal with its pension problem – at least not without borrowing money to temporarily paper over its growing debt.

All these games are about avoiding dealing with the obvious fact that California’s public-employee pensions are absurdly generous, filled with costly and anger-inducing features (spiking, double-dipping, liberal disability retirements, etc.) and unsustainable.

In 2011, the state’s official watchdog agency, the Little Hoover Commission, argued to the governor that “Public agencies must have the flexibility and authority to freeze accrued pension benefits for current workers, and make changes to pension formulas going forward to protect state and local public employees and the public good.” Six years later, the governor is still just chipping away at the edges by embracing gimmicks.

April 26th

By Steven Greenhut | Tens of thousands of people marched in hundreds of cities last week as part of something billed as the March for Science. The event, which coincided with Earth Day, was meant to rebuke the Trump administration’s global-warming skepticism and its plan to cut taxpayer funding for the Environmental Protection Agency and other federal agencies that arguably deal with “science.”

“The job of science is to both understand the Earth, understand the things that we can get out of the Earth, how we’re going to interact with it, how we’re going to make the Earth a better place,” said a representative of the Carnegie Institution of Science, in a news report. “So seeing it fall under such hard times or negative impressions of it is just amazing to me.”

It’s a stretch to suggest that the prominence of scientific knowledge in general is falling under “hard times” because of recent proposals to trim the budget of some massive government bureaucracies. Judging by the anti-Trump signs and demands for more funding for various programs that proliferated at the marches, it seems they were more about political science than the kind of hard science that March for Science organizers had touted.

Nevertheless, the marchers are onto something, although their concept should be applied instead to a different discipline. “I think we need to have a March for Math. How you gonna be over $19 trillion in debt and still spending?” wrote commentator Julie Borowski. Indeed. Our political leaders, in California especially, are enthralled by climate science, and have embraced myriad programs to deal with the issue of man-made global warming.

No, most legislators aren’t at war with science. They remain at war, however, with basic numbers. Congress continues to spend money even though the federal budget is trillions of dollars in debt. How does that work? We keep hearing – from members of both parties, by the way – that the key is cutting government waste. But there’s no appetite for cutting entitlements, or defense spending, and there’s no way to cut service on debt. After those items, the federal government already is running a deficit. That’s an obvious addition problem.

In California, legislators in 1999 passed a law that led to a tidal wave of retroactive 50-percent pension increases for government employees across the state. Its advocates claimed that such a huge giveaway won’t cost taxpayers a dime. And that one law, passed with bipartisan support and over the objections of fiscal watchdogs, has laid the groundwork for California’s continuing pension problems, which have unfunded liabilities estimated as high as $1 trillion.

That math deficiency ought to lead to angry protests in cities across the state, let alone marches.

Former Gov. Arnold Schwarzenegger’s pension adviser, David Crane, said in testimony before the state Senate in 2010, that the California Public Employees’ Retirement System (CalPERS) “has not been requiring adequate contributions when pension promises are made, virtually assuring deficiencies for which only the state is on the hook. … Initial contributions are determined by investment return assumptions. For example, in 1999 CalPERS based pension contributions on an 8.25 percent annual investment return, which implicitly forecast that the Dow Jones Industrial Average would reach roughly 25,000 by 2009 and 28,000,000 by 2099.”

We see the Legislature and then-Gov. Gray Davis not only were incapable of doing simple math problems, but they embraced fiscal models that had more to do with “magical thinking” than “mathematical reasoning,” especially when it comes to multiplication tables. Don’t they know that inadequate contributions and overly optimistic rate-of-return predictions multiply the size of the shortfall and have a cascading effect?

Similar math problems continue. In its last fiscal year, CalPERS’ investments earned a return of less than 1 percent. The agency responded by voting to reduce its expected return rate to a still-too-high 7 percent, which suggests legislators need to brush up on the concept of compound interest.

State leaders didn’t know – or were so eager to increase benefits for their union allies that they chose not to know – that retroactive increases would lead to an exploding membership in the $100,000 pension club, and resulting cost increases for local governments. Those governments would raise taxes and pare back budgets. That’s a subtraction problem that legislators and CalPERS overlooked, although subtracting personal income and reducing public services to make up for exponential growth in public-sector pensions have never been much of a concern to them.

California officials have trouble with percentages, too. For instance, CalPERS will soon have more people receiving benefits from the system than paying into it. The pension fund’s defenders will say that’s not a problem given the fund is supposed to be self-sustaining, which means that the amount of money paid into it plus interest earned from investments pays for all the retirement costs. Yes, it’s supposed to be, but it isn’t self-sustaining. The system’s “unfunded liability” refers to the amount that isn’t paying for itself, and is backed by the state’s taxpayers.

It’s hard to see thousands of people rallying to the cry, “no unsustainable pension systems,” but it might do more good than yelling about “science.”

The Jerry Brown administration and the Democratic Legislature have not put the pension issue – or the retiree medical issue, which may be an even bigger problem – on the agenda since the 2012 passage of the Public Employees’ Pension Reform Act. PEPRA, they say, has reformed the system. The act reduces benefits almost entirely for newly hired public employees. Here’s where math education comes in handy. Those employees won’t start retiring for 25 or 30 years, so slightly reducing their benefits will do little to deal with the current pension debt.

Some California cities (Stockton, Vallejo, San Bernardino) have gone bankrupt, but none of them have trimmed pension benefits for current employees, even though a federal judge in the Stockton bankruptcy case said that cities may “abrogate” pension promises in bankruptcy. Before the decision, CalPERS had argued that this wasn’t allowable. Essentially, cities would be forced to pay benefits they had promised even if they didn’t have the money to do so. Talk about the New Math.

Lo and behold, Vallejo and Stockton have continued to have fiscal problems even after exiting bankruptcy. Regarding San Bernardino’s exit plan, Moody’s reported last week that the city “will face operational challenges associated with deferred maintenance and potential service shortfalls, which, added to the pension difficulties, increase the probability of continued financial distress and possibly even a return to bankruptcy.” Officials in all those cities insisted their bankruptcy work-out plans would fix their cities’ problems.

These are definite math problems. The impact of ignoring math won’t mean that planet Earth dissolves in a giant fireball, as some global-warming activists claim, but it will mean that cities will continue to face “service insolvency” – when there’s enough money to pay the bills, but not to provide an adequate level of public services. Other cities will no doubt face actual insolvency. Some people may lose their pensions. Taxpayers will continue to face higher taxes. Businesses will continue to flee the state. Unlike global warming, this is something local officials can really change if pressed to do so.

There are lots of statistics to add and subtract here, even if there’s little understanding of them by those who make the decisions and spend our money. After the Governmental Accounting Standards Board (GASB) issued new rules that prodded governments into more accurately reporting their liabilities, the size of California’s stated debt has soared. That’s a good step in the direction of honest math, but it’s only the first step forward.

Maybe it is time for concerned citizens to march to Washington, D.C., and Sacramento – and to their local City Hall as well. They can carry signs, although it’s hard to come up with pithy comments that rhyme with “unfunded liabilities,” “service insolvency,” “3 percent at 50” and “assumed rates of return.” Still, it might be worth trying. Rhode Island Gov. Gina Raimondo, a Democratic advocate for pension reform, has said the pension problem is “about math, not politics.” She’s right – and it’s also a perfect slogan for a march.

Steven Greenhut is a contributing editor to California Policy Center. He is Western region director for the R Street Institute and writes a weekly column for the Orange County Register. Write to him at sgreenhut@rstreet.org.

Posted in Uncategorized at April 26th, 2017 by Jack Dean| Comments Off on How about a March for Math?

April 17th

Your humble editor is heading to Sacramento in the wee hours of Tuesday morning to participate in a day-long conference which will assemble taxpayer organizations from up and down the state of California. It’s being sponsored by the Howard Jarvis Taxpayers Association. I’ll be participating on a panel about — you guessed it — public employee pensions. — Jack Dean

Posted in Uncategorized at April 17th, 2017 by Jack Dean| Comments Off on Why so few headlines today?

April 5th

By Steven Greenhut | Gov. Jerry Brown and Democratic legislators have caused a stir with their plan to increase taxes to pay for the state’s unquestionably decrepit infrastructure of roads and bridges. Instead of thinking of this as a new transportation tax, however, Californians should see it as a pension tax, given the extra money plugs a hole caused by growing retirement payments to public employees.

Consider this sobering news from CALmatters’ Judy Lin in January: “New projections show the state’s annual bill for retirement obligations is expected to reach $11 billion by the time Brown leaves office in January 2019 – nearly double what it was eight years earlier.” That’s the state’s “annual bill,” i.e., the direct costs taken from the general-fund budget. That number doesn’t even include those “unfunded” pension liabilities that according to some estimates top $1 trillion.

That’s more than double the $5.2 billion a year the Brown administration hopes to raise from a plan that would boost gas taxes by 12 cents a gallon, raise the vehicle-license fee by $25 to $175 a year (depending on the value of the vehicle), impose a $100 annual fee on electric cars because they don’t currently pay gas taxes and include a large hike on diesel fuel. Money is fungible, so if the state overspends on pensions, it has to make it up somewhere else.

The story refers to the Public Employees’ Pension Reform Act of 2013, which was the governor’s only attempt in his administration to rein in pension costs. Because that reform applies to new state hires, it won’t produce noticeable savings for years, the article explains. As I’ve often noted, it also was unnecessarily modest and exceedingly cynical.

The governor’s original plan included some serious reform ideas, including a proposed hybrid system that nudged public employees away from the debt-laden “defined-benefit” plans they now enjoy toward a mixed plan that included some elements of a 401/k program. But he didn’t push for it. Instead, he caved in to his union allies.

Here’s where cynicism comes in: The transparent goal was not to fix the broken pension system, but to woo voter support for Proposition 30, the laughably titled “Temporary Taxes to Fund Education” initiative. The measure raised sales and income taxes. The “temporary” moniker is laughable because Prop. 30 backers asked voters to extend the income-tax portion of the taxes by a dozen years in 2016, and they obliged. (It’s a safe guess those taxes won’t just expire in 2030 – at least not without another union-backed attempt to extend them.)

At the time, the state budget crisis was in the news, as were soaring public-pension liabilities. Polling looked dismal for Brown’s pet tax increase, which was the linchpin of his effort to bring the state out of its deficit. He had to convince voters that the state was serious about reforming itself. And, voilà, the PEPRA legislation was born. Voters obliged by OK’ing the tax hike, and then legislators and the governor quickly moved past the pension issue.

Fast forward five years and the state has another big problem. Its general-fund budgets have remained balanced. But Democrats and Republicans alike have been complaining about the estimated $130-billion backlog in infrastructure of all types, especially after the crumbling emergency spillway at Oroville Dam caused the evacuation of 188,000 people in the Sacramento Valley this year. And once again the governor turns to a tax-increase plan.

Polling shows the public dubious of the tax plan. Californians oppose the myriad tax-hike proposals, but overwhelmingly agree (61 percent) with Republicans that instead of raising taxes, the California Department of Transportation,Caltrans, should “make better use of revenue.” Instead of seeking voter approval for a tax hike, the governor needs only convince a supermajority of legislators in a Legislature where Democrats hold supermajorities in both houses and where a handful of Republicans in swing districts might be on the fence. He also needs to hold onto a handful of moderate Democrats in tough districts who are not certain “yes” votes on any type of tax increase.

The joint Assembly and Senate GOP statement is on point: “Our state has become increasingly unaffordable for ordinary Californians. We can fix our roads and bridges by simply ensuring that the billions of dollars that drivers are already paying in transportation fees and taxes are actually used for transportation purposes, rather than being swept into the state’s general fund.”

The governor noted that, yes, roads cost money and compared it to ignoring a leaky roof on one’s house – it gets worse if you ignore it. True, but Brown does the same dance each year. He introduces a budget that dramatically underfunds transportation, then holds it hostage to a tax hike. He continues to raise salaries for public employees, which also raises those pension contributions, but he won’t deal with roads and bridges without a tax. And he won’t deal with pension costs and other major problems that would free up money for roads.

And he won’t reform the way Caltrans currently is spending its money. The Legislative Analyst’s Office in 2014 noted that Caltrans is “overstaffed by about 3,500 full-time equivalents beginning in 2014-15 at a cost of more than $500 million.” The Sacramento Bee’s Dan Walters put it more directly when he referred to union “featherbedding” at the agency.

Not much has been done in the ensuing years to fix that problem borne of outsized union influence, yet the governor is back crying poormouth and insisting the state’s hard-pressed workers increase their monthly gas outlays.

Furthermore, California taxpayers receive a really poor bang for the buck when it comes to transportation thanks to the state’s ill-performing bureaucracy and outdated union rules. “California spends over $400,000 per state-controlled mile of road. Texas, in contrast, spends less than half that – $177,000 per mile,” according to Reason Foundation’s Baruch Feigenbaum, writing in the Orange County Register last October.

It’s not just unions that are at fault, of course. Gov. Brown remains fixated on building the $68-billion-plus High Speed Rail system that is supposed to connect Los Angeles to San Francisco. If the governor had as much zeal for fixing freeways and levees as he has for a system that seems unnecessary (Southwest Airlines will get you from San Francisco to Los Angeles in around half the time of the best estimates of the proposed bullet train), the state might have more cash to deal with the problem.

The Howard Jarvis Taxpayers Association points out that general-fund spending has gone up $36 billion in the last six years and that additional money has not been used for transportation. There always are other spending plans, even though infrastructure – rather than new social spending – is supposed to be one of state government’s top priorities.

Even the current proposal has some odd “infrastructure” line items. As the California Policy Center’s Marc Joffe points out, the $52.4 billion plan (over 10 years) would spend $7.5 billion on public transportation and $1 billion on bicycle and pedestrian lanes. Those items have value, of course, but the tax hike is supposed to fund critical priorities.

The good news is the state finally is getting serious about addressing its long-neglected infrastructure backlog, but let’s not forget the backlog wouldn’t be nearly as large had our state’s leaders dealt seriously with its growing pension problem – or at least tried to take on union interests that misspend scarce resources and drive up the cost of repairs. Think about that when you watch your own transportation costs mushroom.

Steven Greenhut is a contributing editor for the California Policy Center. He serves as the Western region director for the R Street Institute and writes a weekly column for the Orange County Register.

Posted in California at April 5th, 2017 by Jack Dean| Comments Off on Massive California road tax really is a pension tax

March 16th

By Marc Joffe | While the public pension crisis has been an issue on the right for many years, left-wing thinkers show relatively little interest in the issue. When progressives do opine on pensions, they often reject the alarm expressed by conservatives, seeing it as a smokescreen for unneeded austerity or a way to attack the public sector. In a deep blue state like California, pension reform advocates will have to reframe our arguments to better engage the left. Any such reframing should focus on two themes: sustainability and fairness.

Progressives are deeply concerned about climate change largely because scientists predict that greenhouse gas emissions will cause long-term environmental consequences. These effects, such as rising sea levels and severe heatwaves, will cause deteriorating living conditions for future generations. In short, they believe that greenhouse gas emissions must be capped because they are unsustainable.

Pension reformers have plenty of evidence that public employee retirement benefits are also unsustainable. For example, over the last ten years CalPERS contributions have been growing at a slower rate than benefits and the system is less than 80% funded. Unless something changes, there will be a day of reckoning as we have seen in places like Detroit and Puerto Rico. Even in the City of Dallas, a run on the pension system forced the mayor to change promised benefits without notice.

So, if we don’t want to leave a mess for future citizens and government employees, it is essential that we place public pensions on a sustainable footing: one in which conditions do not continuously deteriorate and there is a high likelihood that all promised benefits can be paid without crowding out other spending priorities.

Progressives also have a strong belief in fairness, which is why concerns over income inequality have gained so much traction. To many on the left, it seems unfair that some should be able to live in great comfort while many others struggle to make ends meet. This is why we have a progressive income tax system – a legacy of the first Progressive era a century ago.

While the largest fortunes are made in the private sector, many public sector managers and public safety workers are becoming rich from government work. At our $100k Pension club website, California Policy Center lists over 50,000 public sector employees who receive more than $100,000 in annual pension benefits. Many members of the $100k club receive cash benefits in excess of $200,000 and even $300,000 annually, plus retiree health insurance.

A public employee retiring in his fifties with a $300,000 annual pension, could easily live another thirty years. That translates into lifetime pension benefits of $9 million before factoring in cost of living increases. Public employees retiring at a young age with a comfortable income can further enrich themselves with consulting gigs or new jobs in either the public or private sector. Their pension benefits are not reduced when they receive employment income. This contrasts to social security beneficiaries who lose $1 of benefits for each $2 they earn above $16,920 between the ages of 62 and 66.

In fact, retirement income prospects are much better for career public servants in California than for those of us who must rely on social security. In a new study for California Policy Center, Ed Ring finds that California public employees who worked 30 years receive pension benefits averaging $68,673. This is more than double the maximum social security benefit for workers who begin collecting benefits at the full retirement age of 66.

So, we see a great inequity between private and public workers generally, and especially the highest paid government employees who qualify for gold plated pensions. To level the playing field, perhaps some Progressives would agree that benefits for the richest pension beneficiaries should be capped or taxed. Savings realized by the state and by local governments could go to restoring public services lost due to increasing pension costs, or to bolstering the assets of public pension plans – making them more sustainable over the long term.